Top Contributor: Mike | Created when NASDAQ:AMZN was $69.10 | Edit | History
Amazon stock is obscenely overpriced. Although the stock has fallen since its run up in June 2007, its P/E ratio currently exceed that of almost all major internet companies. Profits are growing, sure, but there is very little rational about current price levels
With 47 out of 50 states currently operating in the red, AMZN will soon be forced to collect online sales tax. Their current stance that it is too difficult holds no water as they easily collect sales tax for their fulfillment partners. The lack of an online sales tax currently provides AMZN a huge competitive price advantage. For example, in CA a $300 TV would cost 9% more, plus an additional waste recycling fee if purchased at a bricks and mortar store. Current online sales laws have indirectly wiped out countless bricks and mortar competitors.
The potential valuation hit to AMZN is huge because:
1) AMZN valuation is based on a perfect scenario of growth, not existing fundamentals or GARP growth.
2) Much of AMZN's growth has been in large ticket item categories where consumers have been most incentivized to shop offline (electronics) and buy online.
3) AMZN's margin has always been challenged and scalability hasn't applied to margin expansion. With the loss demand associated with a +5 to 10% pricing hike to buyers, AMZN margins would have to start approaching grocery store margins to remain price relevant and maintain revenue growth.
3) AMZN can only hope to stall the eventual online sales tax issue, however, to do this their legal and lobbying fees will grow exponentially in 2011/2012
4) After the initial bellwether state to win in court, every state will seek online sales tax collection and possible reimbursement. If there is reinbursement or penalties to be paid, the hit to AMZN's balance sheet could be huge.
5) Unfair sales taxation has caused such an unfair playing field that it has literally dammed up new bricks and mortar competition for commodity type products. Once the issue has been resolved, countless new brick and mortar competitors may appear.
6) AMZN has invested heaviliy in distribution and fulfillment based on state of the art LEAN methods, however, with the caveat that their business model was built on avoiding sales taxation. This means they have no distribution centers in the most populous states. This will turn from advantage to disadvantage after online sales taxation.
One year ago Amazon began its rally to $100. Y/Y margins showed improvement and bears like the author got squeezed badly. The stock climbed for three consecutive quarters as the street believed margins were growing. But are margins really improving? Last quarter, Amazon operating margins reversed course again and so did the stock price. Amazon's share price is highly correlated with its operating margins.
Current midpoint guidance expects 1Q08 revenue to be $4.05B and operating income of $177M. This Yields an operating margin of 4.4% -- forty basis points lower than the year-earlier period and the lowest first quarter numbers in recent history.
Expect Amazon.com margins to be pressured again and expect the share price for follow suit.
No one will be buying CDs or DVDs 5 years from now, and these are a major component of Amazon's earnings. While Amazon is pouring resources into its downloadable media service, they will have to fight an uphill battle for this market, as Apple's iTunes currently dominates.